The Science and Art of Finance

If you ask the folks at Investopedia (Kenton, 2019), they will tell you that the main goal of corporate finance is to maximize the value of the company for shareholders. Though this seems like an innocuous premise, the effort to maximize value has led down some nefarious paths the last few decades with the Dot Com bubble, the Worldcom and Enron scandals, and the housing crisis.

But, as Berman and Knight point out in Financial Intelligence (2008), good finance is essential for anyone who wants to have a business at all. Business amounts to the numbers, and so we must be able to grasp them and make use of them to do anything in the business world.

Corporate finance professionals have a toolbox to help them achieve their goal, which includes ratio analyses, development of common-size financial statements, cash cycle analyses, sources and uses analyses, discernment of growth potential, and fashioning forecasts and pro forma financial statements (Harvard Business School, 2009).

By use of these instruments, corporate finance professionals can advise on key business decisions involving investment acquisitions, shareholder dividends, the management of assets, liabilities, and inventory, and other allocation of resources.

The way financial professionals assess the numbers affects how the business works at almost every level. Berman and Knight (2008) give a striking example from the airline industry.

When the airlines realized their planes were lasting longer, they decided they could depreciate over more time, which meant that profits per year went up, leading to investors deciding to buy more stock, companies offering more bonuses, and other implications.

References

Berman, K., Knight, J. (2008). Financial intelligence: what you really need to know about the numbers. Boston: Harvard Business School Press.

Harvard Business School (2009). Finance introductory section: introduction [Flash file]. Retrieved from https://eproduct.hbsp.harvard.edu/eproduct/product/finance_intro/content/index.html#node/5475.

Kenton, W. (2019). Investopedia: Capital Finance. Retrieved from https://www.investopedia.com/terms/c/corporatefinance.asp